Protectionism and the Case for Globalization

The global economy is falling apart, and economists and lawmakers alike are searching desperately for solutions. Protectionism and globalization are two approaches to our economic crisis. Complex economics aside, protectionism is the protection of a nation’s domestic industries by stifling foreign competition with tariffs and other means, while globalization is the encouraging of industries to expand and sell across the world. While it was agreed at the World Economic Forum in Davos, Switzerland that globalization is key to getting us out of this crisis, protectionist policies and sentiments are becoming increasingly potent across the globe; Russia is putting tariffs on automobile imports, “buy American” provisions are being proposed for part of the U.S. Stimulus package, and Timothy Geithner and others are accusing China of manipulating its currency. To give a historical example of protectionist policy: In the run-up to the Great Depression, the U.S. begin to put tariffs on outside goods, that is, the government charged a higher “tax” on foreign imports. This was an effort to protect American farmers, but it ended up starting trade wars that led to a 66% decline in World Trade. Protectionist policies will slow down our economy even further by stifling interaction between economies, while globalization will help us solve our economic crisis.

Globalization is one way we can get the global economy working again. Free trade and globalization go hand in hand. With policies that support free trade, we are supporting the free movement of goods between nations. This in turn, believe it or not, leads to more prosperity for everyone. It is better for emerging markets because jobs are being brought to their countries, but it also helps economic powerhouses such as the U.S. because American companies are making profits overseas as well as at home. These profits lead to higher wages for American workers and more employment in America. With more people employed and being paid more, more money is flowing through our economy via consumer spending. This spending will help stimulate our economy.

But Globalization has another unique effect; if companies have branches all across the globe, governments are forced to work together. This allows us to have a truly global economy, one that brings countries together to help prevent and deal with economic recessions and depressions. We are already a global economy, full of companies that have globalized and of countries that are working together. We have the International Monetary Fund and the World Bank, two international organizations the help facilitate economic growth among nations. Nevertheless, protectionism is rising and is threatening our global economy.

The most obvious example of the negative effects of protectionism is it can cause trade wars. Protectionist policies wouldn’t be a threat if they were isolated, but if one country implements protectionist policies so will another. This is a trade war, and these “wars” halt trade. A lack of trade can have devastating effects. An example would be if Canada, from whom we get 25% of our oil, stopped selling oil to the U.S. if the U.S. decided that all steel for the infrastructure projects in the economic stimulus package on the Senate floor right now had to be made in America. Fuel prices would shoot up drastically and slow consumer spending, slowing down our economy. The goal of “buy American” provisions such as this is to create jobs in America, but in the long run, these policies hurt our economy.

Many in favor of protectionist policies such as “buy American” say it will help the American economy because it will facilitate job growth. Proponents claim that if more American steel were bought, there would be more jobs in America. But if America were to stop buying Canadian steel and Canada retaliated (as they have threatened to do) by not selling key resources to the U.S. and not buying American goods because of such as provision, the American economy would feel much more pain. American companies lose nearly all profits from Canadian sales, so they would have less money to employ American workers. They also wouldn’t have the money to produce goods for America, therefore causing a shortage of goods. Small businesses, which form the foundation of the economy, would not be stimulated due to less spending caused by low wages and high unemployment. Low wages and high unemployment can be attributed to the Canadian boycott of our goods.

The negatives of protectionism outweigh its positives, while with globalization the exact opposite is true. The U.S. can’t pass “buy American” provisions because the U.S. risks starting a trade war which would lead to a reduction in trade. This reduction would never be good for a supposedly global economy because in a global economy it is vital that economies are working together for greater prosperity for all. We see from the Great Depression what protectionism can do, and since this global economy is currently deep in recession and could be on the verge of depression, protectionist policies that will dig us deeper into this hole cannot be encouraged. Instead the U.S. along with other nations must encourage free trade and globalization. When economies are working together and trade is happening, people are working and spending, and our economy is working like a well-oiled machine again.

-Martin Page